South Korea’s central bank surprised the world on November 28 by cutting its benchmark interest rate by 25 basis points to 3%. This marks the Bank of Korea’s (BOK) second consecutive rate cut, signaling its commitment to reviving economic growth amid slowing exports and global uncertainties. 

The decision comes just a month after the central bank lowered rates for the first time since May 2020, breaking its cautious stance held since August 2021. The back-to-back rate cuts highlight the BOK’s growing concern over economic challenges, even as the South Korean won remains weak against the U.S. dollar and household debt levels remain high.

Lower growth projections as exports slow

South Korea’s central bank on Thursday cut its benchmark interest rate by 25 basis points to 3% in a surprise move. Economists polled by Reuters had estimated the bank to hold rates at 3.25%.Read the full story here: https://t.co/X2qIsN4Gxr pic.twitter.com/fg2RGj14Oy

— CNBC International (@CNBCi) November 28, 2024

The BOK revised its economic growth forecasts downward, predicting a slower recovery for South Korea’s economy. Growth for 2024 is now expected at 2.2%, down from an earlier forecast of 2.4%, while the outlook 2025 has been lowered to 1.9%. These estimates fall below the International Monetary Fund’s 2.2% projection for next year and the country’s long-term potential growth rate of 2%.

The reduced forecasts come as South Korea grapples with declining export momentum, a key driver of its economy. Although exports rose by 4.6% in October to $57.5 billion compared to last year’s period, this growth was the weakest in months, reflecting increasing global competition and structural issues. Analysts also pointed to uncertainties surrounding U.S. trade policies under the Trump administration as a significant factor weighing South Korea’s trade-dependent economy.

Central bank prioritizes growth over currency stability

The rate cut decision underscores the BOK’s focus on economic recovery over currency volatility and inflation concerns. Governor Rhee Chang-yong acknowledged the intensified downward pressure on growth and emphasized the need for proactive measures to stabilize the economy. Despite concerns about the weakened won and record household debt, the central bank expressed confidence in its ability to manage foreign exchange market volatility with ample foreign reserves.

The BOK also noted that inflation remains low, with consumer prices rising just 1.3% in October, the slowest pace in nearly four years. Inflation forecasts for 2024 and 2025 were revised downward to 2.3% and 1.9%, respectively, supporting the decision to ease monetary policy.

Global Uncertainties Add to Domestic Challenges

The BOK’s rate cuts are due to the uncertainty of global economic conditions. The central bank pointed to the impact of expected policy changes under the incoming Trump administration, which has created additional risks for export-dependent economies like South Korea. Governor Rhee stated that recent global developments exceeded initial expectations and emphasized the need for continued vigilance as the country navigates these challenges.

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